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Unformatted text preview: UES FOR DISCUSSION
a. The net income and comprehensive income for CVS are very similar due to the relatively low dollar amount
of changes to equity that did not also affect profitability. Caterpillar, on the other hand, saw a significant
drop ($3,788 million) from net income to comprehensive income due to losses from foreign exchange,
pension obligations and securities holdings. b. Caterpillar operates globally, so it must deal with foreign currency exposure; as shown, if exchange rates
move against the company, hits to equity occur. CVS is mainly focused on its domestic retail operations,
so it does not have this same exposure. Caterpillar has negotiated labor contracts with its production
employees that specify some defined benefit pension obligations for the company, which bring into effect
market and interest rate risks that can create equity losses for the company. CVS employs a different
type of workforce and does not offer its employees the same type of retirement benefits. c. An analyst would focus on the companies’ profit levels, but would also focus on what other factors could
harm the company’s equity cushion. A certain level of expertise and understanding in foreign exchange
markets and trends would be required for an analyst following Caterpillar; an analyst focused on CVS
would not be as concerned with the FX markets. Similarly, an understanding of pension accounting and
assumptions appears more important for an analyst following Caterpillar than it would for someone
following CVS. ID13–2
a. Tightened credit markets will mean less volume in debt issuances. Since each issue is rated by an
agency, the revenue of the ratings agencies will decline as the number of debt issuances declines. b. The income statement will be directly affected with a drop in revenue and a consequent drop in profits.
Stockholders’ equity will be affected due to the reduced net income shown on the income statement.
To balance the lowered equity, the ratings agencies will either reduce asset balances or increase
liabilities. c. It is very possible that the companies will see less volume in the future, even if the credit markets
return to their previous levels. It is possible that we will see a restructuring in the markets, with less
emphasis placed on the ratings assigned by outside agencies. Given the fact that the agencies
assigned inaccurate grades on the mortgagebacked securities, and the fact that these inflated grades
caused investors to lose principal, it is very possible that investors will look to a different mechanism
to help understand risk. This potential would permanently depress revenue and profit levels for the
ratings agencies. ID13–3
a. For an event to be classified as extraordinary, the event must have been both unusual in nature and
infrequent in occurrence. b. If the eruptions continue periodically, then such eruptions would probably not be viewed as being infrequent
in occurrence. Thus, any losses resulting from future eruptio...
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- Fall '08